A web app is an application that requires at least a browser to run. Why? Because the web as we traditionally know it is accessed through a browser and any application that still requires a browser to run cannot be considered a desktop app.
As for prism it still doesn't actually make that app a desktop application because all it still contains the environment designed to run web apps and just simulates a desktop app. You still use it to run apps designed for the browser.
The blurring of the lines will come as web apps start to no longer need a browser to run. So when the day comes I can start up my OS, type gmail.com, and it runs the Gmail app, then the distinction between web and desktop app will truly have vanished. But until then anything that still requires a browser, or browser technology is still in the transition stage.
If you strip away the visual chrome, a browser is simply a piece of software that interprets a certain set of languages and displays the result, not unlike the JVM or the CLR.
As for your example, I can do that now - when I type gmail.com into the Vista Run dialog, my browser opens up and runs the Gmail app. How is this different from typing in the name of a JAR file and having it run, aside from a different program being run to interpret the code? Also, what about the tight IE-Explorer integration in XP, where I could open a normal Explorer window, type in gmail.com in the location bar, and then Gmail would open in that window (and have the UI change to IE's chrome)?
Because your internet explorer does not allow apps to access low level functions. It still resembles its original purpose: the serving of static pages.
Web apps should break out of the prison that is the browser.
As for prism it still doesn't actually make that app a desktop application because all it still contains the environment designed to run web apps and just simulates a desktop app. You still use it to run apps designed for the browser.
The blurring of the lines will come as web apps start to no longer need a browser to run. So when the day comes I can start up my OS, type gmail.com, and it runs the Gmail app, then the distinction between web and desktop app will truly have vanished. But until then anything that still requires a browser, or browser technology is still in the transition stage.